Greece’s faulty bailout math

After promising up to €86 billion to finance a third bailout for Greece, the country’s creditors now just have to find the money.

So far, the numbers don’t add up. The figures officially mentioned since Athens and other eurozone governments clinched a deal July 13 don’t square with the official statements of the signatories themselves.

The reason is politics.

The International Monetary Fund, which contributed about a third of the funding of the two previous Greek bailouts in 2010 and 2012, has yet to say whether it will put fresh money into a third. The IMF won’t go in without debt relief. Eurozone governments won’t go in without the IMF, but want debt relief to be only “considered after the first positive completion of a review.”

Either someone has to give in, or Greece’s creditors must come up with a major fudge to square their impossible circle.

The IMF can only lend to a country if it deems its debt sustainable. Asked on July 17 whether the deal agreed by Greece and its eurozone creditors a few days before would be viable without debt relief, IMF managing director Christine Lagarde said: “The answer is unequivocal: No.”

A major fudge is the likely outcome.

Germany and a few other eurozone governments refuse to talk about debt relief for now. Chancellor Angela Merkel said in a lengthy interview Sunday on German public television that the only form of debt relief Berlin will consider is a re-profiling of Greece’s obligations by extending maturities and lowering interest rates.

Merkel pointed out that creditors have previously taken such measures to relieve Greece’s debt burden and are willing to do so again. But she stressed that such a step, as outlined in the deal reached last week with Greece, could only come if Athens passes its first bailout review, expected in November.

“These steps are included in the mandate and we can discuss them, but only once Greece has successfully completed the initial review of its program, not now, only then,” Merkel said, reiterating her opposition to an upfront “haircut” on Greek debt.

The chancellor was merely reiterating the European Council’s July 12 statement, but the fact that she took such a definitive stance on the issue in a primetime television interview suggests that she will not back down on this point.

At the same time, on the insistence of Germany and its closest eurozone allies, the same statement insists that the IMF contribution “is a pre-condition for the Eurogroup to agree on a new program.”

The Fund was called in to take part in Greece’s financial rescue in 2010 on the insistence of Merkel, who thought the institution’s reputation would lend credibility to the conditionality attached to the bailout.

No ‘ifs’ or ‘buts’

Klaus Regling, managing director of the European Stability Mechanism — the eurozone’s bailout fund — said last week in an interview on German television that it would contribute “perhaps €50 billion” to the bailout.

About half that amount, according to the July 12 statement of the European Council, will be devoted to a direct recapitalization of Greece’s banks, which reopened Monday after remaining closed for two weeks.

Were Greece’s two former bailouts to serve as a template, the IMF would then put some €25 billion into the third one. It is unlikely to do so if it doesn’t get firm assurances about some serious debt restructuring. And even then, the IMF’s board, which had grown restive in the last years about the Greek bailouts, is likely to resist the possibility of putting fresh money into the exercise’s third iteration.

Some €15 billion which remains due on the IMF’s current Greek bailout can possibly be counted in. That program, unlike the eurozone assistance which expired on June 30, was only due to expire in March 2016. The IMF can resume disbursing the aid, now that Greece has paid its arrears to the Fund.

According to an IMF insider, there is “next to no chance” it would agree to put up €10 billion more for Greece without a firm debt relief commitment.

“No ‘ifs’ or ‘buts’ there,” said the source.

Given that neither Europe nor Washington wants the deal to collapse, the major fudge is the likely outcome.

That, according to a eurozone official, could come when a review of the program comes up in the fall. In that scenario, the IMF wouldn’t commit new money right away. In lieu of a formal assessment, the creditor institutions — experts from the European Commission, the IMF and the European Central Bank — would simply review the steps Greece has already taken in order to open the bailout talks.

Greek Prime Minister Alexis Tsipras muscled a long list of tentative reforms demanded by creditors through the Greek Parliament last week.

If Tsipras proves consistent in the next three months, talks about a debt restructuring could then take place, providing cover for the IMF to take part in the third bailout.

That ‘fudge scenario’ — which has no guarantee of getting Merkel’s approval — would still only make some €75 billion available to Greece, leaving a €7-to-11 billion shortfall over the three-year period. The country’s creditors made it clear they expect Greece to contribute to its financing needs — by running a primary budget surplus from next year on, or, for example, by speeding up its privatization efforts.

With some creative public accounting, and at the risk of stretching further the bailout’s already-weak credibility, they could then make the maths finally add up.

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Gert

If the IMF really thinks a Greek debt relief is needed, why don’t they set the example? It is easier of course to ask others to do so.

Posted on 7/21/15 | 6:24 AM CEST

Gert

According to IMF rules, a debt relief is not possible, but this is the same for the Eurozone. There are much poorer countries contributing to the IMF than Greece, along with much wealthier. Also that is exactly the same as the Eurozone. So, if the IMF really thinks a debt relief is necessary, they should set the example.

Posted on 7/21/15 | 7:28 AM CEST

Alan Ritchie

‘With some creative public accounting…..’ Are you utterly, totally and completely mad??????
Is that not partly what got Greece (with a little help from Goldman Sachs) into the Euro straitjacket in the first place? Mind you, at inception only Luxembourg actually met all the tests for membership & France & Germany quickly blew away the Stability & Growth pact when it suited them.
For a strictly ‘rules based’ structure the euro has always been remarkably unruly!!!

Agree with Gert. The IMF has rules which prevent it from taking losses on its loans, so its easy to pontificate. Enough already.

Posted on 7/21/15 | 10:14 AM CEST

ExLiberal

EVERYTHING associated with the Greek “bailout” is a lie.

Posted on 7/21/15 | 1:11 PM CEST

jake

They should have never lent so much money on the first place!
they should have reformed the debt, so that its economy should have grown able to sustain it!
what do u exepct when the gdp drops 25% and you give them such big loans?

Posted on 7/21/15 | 4:06 PM CEST

willie

Let Greece find it’s own way. Enough is enough. No one should be stuck with providing money to this dead beat nation. Other poor countries are more deserving of loans.

Posted on 7/21/15 | 5:43 PM CEST

Blah

“They should have never lent so much money on the first place!”

So it’s always the lender’s fault. Let me guess, the big bad banks held a gun to Greece’s face and said “Take this money and spend it or I will blow off your face!”

Sure blame the banks (ie – goldman sachs), but what of the poiliticians on the other side of the deal table? And what about the people who voted for the politicians that tell them stuff they want to hear? (“If you hairdressers vote for me, I will make sure you can retire at 50 with full pension!”; “I can declare you blind (even if you’re not) and make you eligible for monthly disability checks.”)

Posted on 7/21/15 | 7:59 PM CEST

Andrew

Oh no! Not the Germans dumping their bad debt portfolio onto the UK and other IMF members again?
Surely if somebody makes huge profits from exporting on money they choose to lend, they suffer the consequences if they do it knowing that the customers will not be able to pay. Looks like another case of German rules for rule by Germans to me.

Posted on 7/21/15 | 11:05 PM CEST

aaron saxton

Is there anyone who can realistically see this bailout – even with the provision of some debt relief, work?

Unless the debt relief is within the realms of over 180 billion, there is little chance of success.

And even with the debt relief, can even a recovering Greece really cover this massive bailout?

I just can not shake the feeling that the efforts today are all about salvaging the current scene in the hope a future administration in Greece and Europe can figure out what to do to really fix it.

The irony of that being the answer is clear now, but it would be political suicide for any of the administrations, despite being correct and just.

Posted on 7/22/15 | 5:26 AM CEST

Blah

Instead of protesting on the streets, why don’t they storm the residence of the ex-politicians (who made the shady loans). That would be a better target for the firebombs. The whole country’s going to the dump anyway, might as well take out as many of the crooks as you can.